IRS expands use of legal tools against tax evaders

The U.S. Internal Revenue Service is planning to broaden the use of subpoenas of documents in cases where the name of a taxpayer under investigation is not known. 

The so-called John Doe summonses were a breakthrough for the IRS in tackling offshore tax evasion when they were first addressed to banks to divulge the identity of U.S. customers suspected of maintaining undeclared offshore bank accounts. The use of the legal tool served on UBS in 2008 launched an ongoing U.S. offshore tax evasion crackdown.  

The IRS is now going to target service providers that help facilitate offshore tax evasion both in the U.S. and abroad, said Brian Stiernagle, program manager of the IRS Offshore Compliance Initiative, speaking at the Offshore Alert conference in Miami on Monday. 

“In the next 12 to 24 months, you will see additional John Doe summonses related to parts of the world other than Switzerland, and we are going to go beyond the banks. Intermediaries, service providers and facilitators will be potential targets of John Doe summonses,” Mr. Stiernagle said.  

The Offshore Compliance Initiative started 10 years ago as an investigation into offshore credit card abuses with a team of one investigator and two legal counsels. Following the UBS case, the IRS issued seven additional John Doe summonses related to private banking, which turned the initiative into a full-fledged nationwide IRS program with 16 specialists who conduct investigations. 

“From those summonses we have obtained a significant amount of information, and when you couple that with what we have received from the offshore compliance initiative and the streamlined filing program, we have actually been able to secure quite a lot of intelligence related to what’s going on currently in the offshore transaction world,” Mr. Stiernagle said. 

Most of the summonses related to U.S. banks that served as a gateway into the U.S. banking system for offshore banks by maintaining correspondent bank accounts for them. By granting the summonses for correspondent banking accounts, federal courts effectively extended the reach of U.S. authorities to offshore banks.  

In 2013, the IRS issued John Doe summonses against Bank of New York (Mellon), Citibank, JPMorgan Chase, HSBC and Bank of America to produce information about U.S. taxpayers with undisclosed accounts at Bermuda’s Bank of Butterfield and its affiliates in the Bahamas, Barbados, the Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland and the United Kingdom. 

In the same year, similar orders were issued against Bank of New York (Mellon) and Citibank for the correspondent accounts of Swiss bank Zurcher Kantonalbank, against UBS for the correspondent accounts of Wegelin Bank and against Wells Fargo for the correspondent accounts of CIBC FirstCaribbean.  

The production orders resulted in millions of transactions that are currently being reviewed by IRS investigators. “Our goal is to drive people into compliance,” said Carolyn Schenk, senior counsel with the IRS in Los Angeles. “We realize that we are not going to audit our way out of this problem.” 

The private banking focus will therefore continue. Ms. Schenk announced that “in the near future you are going to see John Doe summonses again with regard to correspondent accounts here in the U.S. of multiple offshore banks.”  

The IRS has also identified a number of abusive offshore service providers and consultants in the U.S. who help facilitate tax evasion and the agency will issue further summonses against them. “These consultants are setting up structures, they are acting as nominees, providing mail forwarding services, all types of things with the goal of helping U.S. persons hide their assets,” Ms. Schenk said. 

For a John Doe summons to be granted by a court, the IRS has to provide evidence that tax evasion by a class or group of unknown individuals may have occurred at a bank. In recent years, the information that forms a “reasonable basis” for suspecting tax evasion has come from two main sources: various offshore voluntary disclosure programs and whistleblowers.  

The summonses against Butterfield and CIBC FirstCaribbean were prompted by a number of the banks’ clients who came clean and disclosed their previously undeclared offshore accounts.  

Lindsay Stellwagen, special counsel with the IRS in Washington, D.C., said, “Whistleblower events were a real game changer for us.” Tax evaders could plan for secrecy by choosing a specific structure or jurisdiction but they cannot plan for whistleblowers, she said. 

Additional information is coming from traditional tax information exchange requests. 

Not so long ago, agents were not interested in putting in treaty requests, Ms. Stellwagen said, but the information that is coming in now is very good. As a result, agents are putting in more requests which in turn lead to more summonses.  

With new data expected from the FATCA initiative, which forces financial institutions worldwide to report U.S. taxpayer accounts and assets to the SEC, U.S. tax authorities will get an even clearer picture of the offshore world.  

“It’s really becoming a bad bet trying to hide money offshore,” concluded Mr. Stiernagle. 


  1. This represents a great and dangerous overreach for the IRS.
    John Doe defendants in a lawsuit are used when possible defendants are not known in addition to the main defendant. For example a mortgage foreclosure would be against the property owners and unknown possible tenants.

    Here it seems that the entire group of defendants are unknown and this is nothing more than a fishing trip for the IRS.
    Essentially they are saying that they don’t know who they are after so we demand you turn over all your customer records, including those customers who have no connection to the USA.

    French, Spanish and Caymanians all your private banking records are subject to IRS scrutiny.
    Only the USA could get away with such bullying.

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